Stories of everyone from your neighbor to your nephew suddenly making thousands of dollars in quick afternoon trades have got everyone talking about #WallStreetBets, Robinhood, and Roaring Kitty. Welcome to ‘meme trading’ – when a hot stock tip rapidly makes its way through rounds of social media until even your grandmother is calling to ask, “Did you get any of that Gamestop?”
WallStreetBets is a forum on Reddit, where retail investors share ideas and talk stocks. One of the contributors goes by an alias of DeepFuckingValue, or Roaring Kitty. His real name is Keith Gill. Back in 2019, Gill and several other investors noticed that Gamestop was being massively targeted by short sellers. That summer the stock price fell under $5.
Short sellers are those who expect a stock price to decline. They borrow shares from a brokerage and sell them to the market at the current price (say, $10). Once the stock price drops, they buy shares back at the new lower price (say, $8) and return them to the brokerage – profiting in the difference ($2 per share). If the company goes bankrupt, the shares lose all value and there’s no buying back or returning them – the short seller made a $10 profit per share without ever having risked their own cash.
The greatest risk is that the price rises instead. The short seller is forced to quickly buy up the shares he owes before they get even more costly. This is called a ‘short squeeze’. With a company that has a small number of shares in circulation, the price can escalate very fast as traders scramble to get those shares, cover their positions or jump on a moving stock.
The Gamestop squeeze got juicy when the WallStreetBets crew started buying shares en masse, believing that it was undervalued and unfairly targeted by the short sellers. Their campaign spread from Reddit to Twitter and caught the attention of a few mega-investors: Ryan Cohen, Elon Musk and Chamath Palihapitiya, who bought even more. An epic short squeeze ensued that sent at least one hedge fund / short seller to the brink of bankruptcy.
Gamestop’s share price now calmly sits above $200. The question is, what next? Unless you are active in Reddit boards or carefully watching the price charts of multiple stocks each day, it’s tough to anticipate where the next short squeeze might arise.
If you work with an investment advisor, you could choose to allocate a small portion of your portfolio where he or she has trading discretion to take advantage of fast trending stock moves.
A more laid-back way to go is with an ETF. Dave Portnoy, founder of Barstool Sports and somewhat of a meme himself, has since launched a social media driven ETF that rebalances each month on the basis of what’s trending. The VanEck Social Sentiment BUZZ ETF, could be an easy way to capture those hot stock moves you never saw coming.
